Best Buy Co. Inc. has discovered that consumers care less about getting the hippest new gadget than they do about getting a good deal on a laptop or flat-panel TV.
The Richfield-based company said Tuesday that sales and profit slid in the third quarter as consumers headed to lower-priced competitors for televisions and video games. Meanwhile, sales of more expensive 3-D and Internet-ready televisions haven't lived up to expectations.
Given the competitive pressures, the nation's largest consumer electronics retailer chopped its annual profit forecast, which sent the stock tumbling to its worst loss in more than eight years. Shares finished the day down nearly 15 percent, at $35.52, after earlier dropping as much as 18 percent. It was the day's biggest decliner on the New York Stock Exchange.
"Essentially, Best Buy has been willing to give up market share in order to expand gross margin," said David Brennan, co-chair of the Institute for Retailing Excellence at the University of St. Thomas. "They're not willing to make those kinds of price cuts -- and the Wal-Marts, Targets, Sam's Clubs and Costcos of the world are eating their lunch."
Brennan noted that the consumer electronics category -- which includes televisions, digital cameras, e-readers and MP3 players -- dropped from representing 39 percent of Best Buy's business a year ago to 36 percent today. The company, instead, has put more emphasis on higher-margin items, such as motion gaming systems and high-tech televisions.
Best Buy's disappointing results came as the Dow Jones industrial average surged to its highest mark this year, amid reports that retail spending is increasing and businesses are feeling more confident.
The Commerce Department said Tuesday that retail sales rose 0.8 percent in November, riding the biggest jump in department store sales in two years.
Best Buy executives said they were disappointed in the results, but that they weren't going to cut prices willy-nilly just to bring shoppers into the store.
CEO Brian Dunn said holiday promotions were delivering as expected and that the quarterly results, which ended the Saturday after Thanksgiving, come "right in the middle of the game." The company will release results of December sales the first week of January.
"The tale of Christmas 2010 is far from over," Dunn said in an interview. "The 10 days before and the 10 days after are critically important to our business. I think they'll be fast and furious."
The company has sweetened a credit offer by lowering the spending threshold for 12 months of interest-free financing from $499 to $299. It also is giving away free smart phones every day in December for customers who sign up for two-year contracts.
Dunn said Best Buy's competitors promoted "third-tier brands as loss leaders," a strategy Best Buy wasn't willing to take.
Competition for Best Buy's bread and butter items has been growing for years, particularly since Circuit City went out of business. Sales of televisions, video game consoles and entertainment software declined in the low double digits for the quarter, Best Buy said. Drooping sales in the gaming sector came as a blow, particularly after the company said it had acquired a 20-month high in market share last year with Wii and PS3 titles, Dunn said.
The success of the tablet computer has cut into sales of netbook and notebook computers, which to date have been strong sales drivers. People now are either buying iPads instead of laptops or they're putting off buying a laptop to wait for the price of iPads to come down.
"Part of it is the cycle we're in," said David Heupel, portfolio manager at Thrivent Financial. "There's just not a lot of new, innovative technologies in TVs to drive people to a specialty consumer electronics store."
Profit at the nation's largest consumer electronics company declined 4.4 percent to $217 million, or 54 cents a share, well below the 60 cents analysts surveyed by Bloomberg had expected. Revenue fell about 1 percent to $11.9 billion.
Same-store sales, a key indicator of a retailer's health because it compares results from stores open at least a year, dropped 3.3 percent. That drop was steeper -- 5 percent -- at its core U.S. stores. Full-year profit is now expected in the range of $3.20 to $3.40 a share, down from a previous forecast of $3.55 to $3.70. Last year the company earned $3.10.
Looking ahead, Dunn believes consumers will catch up with the higher-tech offerings, and Best Buy will be in a position to regain lost market share. Motion-based games, now featured prominently in stores, soon will drive demand for 3-D TVs, he predicts.
And the company will continue to grow Best Buy Mobile, where sales of phones, laptop computers and tablets grew in the low double digits. Smart and mobile phone sales grew 30 percent in the third quarter and provided the highest growth in gross profit of any of its other businesses.
"We've gone through this before," said Heupel. "Seems within a four- to six-quarter period you're going to have a little heartbreak at Best Buy. The positive here is they usually figure out a way to fix it. ... This is more of an issue because it's more top-line related, I think. You're just going to have to wait out the next technology wave to reinvigorate the store and the shoppers that go in there."
Jackie Crosby • 612-673-7335